What is Rangers’ tax case all about?

Unfortunately, any discussion of tax law is unlikely to become a best-seller, and this will be no different. In the interests of making this article readable, I will brush over a few technicalities. If anyone wishes to discuss these, please post a comment and we can explore these issues in more detail outside of the article. There are also a few more details which are critical to the case. I will not be discussing or disclosing these until after the First Tier Tribunal returns a result.

Rangers’ tax problem goes back to the 2000-2001 financial year. A tax plan was purchased from the Baxendale-Walker law firm and Rangers dipped their toes in the waters of a tax scheme which would, a decade later, place a cloud over the solvency of the club.

The scheme, an Employee Benefits Trust (EBT), can be operated legally. So let us look at how an EBT is supposed to be operated. Then we shall look at what Rangers FC have done.

When money is transferred to an EBT, it is no longer the property of the employer. It is the legal property of the trustee. A business owner can legally deposit large amounts of his company’s profits in the trust and then apply to the trustee for a loan. In practice, the loan never gets repaid, and the business owner or senior employee pays only a nominal interest rate on the loan (or tax on the benefit in kind). This is a fraction of the amount of money the loan recipient would have paid had he received the money as salary or a bonus which would be subject to PAYE and National Insurance Contributions. It may seem like a transparent scam to you and me- and it was- but HMRC failed to prove that the loans were not loans and that these schemes were just sham transactions. (See “Dextra” case).

So far, so good for Rangers FC. However, there were conditions behind the decisions that established case-law. Most importantly, such payments cannot be tied to contractual obligations e.g. salaries, appearance money, win bonuses, etc. EBTs worked for entrepreneurs who did not need to write down how much they wanted to withdraw from their businesses. A few senior directors who trusted the company could also join in with this legal loophole, so long as they did not insist that there was a documented promise of what they would receive.

The administrators (usually specialist law firms) are also required to exhibit independence from the company which is depositing money with the trust. So a few requests for loans need to be rejected and some amounts modified. Again, all fine if you are an entrepreneur who understands how the game is played and that everything will work out in the end.

The problems for Rangers started with the fact that footballers and their agents would never be so daft as to trust a ‘nod and a wink’ from a football club executive. Amounts for salaries, bonuses, appearance fees- are all the subject of written contracts. These contracts (which are routinely available during tax investigations) provide the Rosetta Stone for tax investigators. I cannot discuss some of the other evidence against Rangers FC, but I understand that at least some of Rangers FC executives were aware that what they were doing was illegal. These executives appear to have been overly diligent in their record keeping! (You will hear a lot more about this after the case is complete).

So facing a documentation trail that proves that the payments to the EBT were for contractual payments which would normally be subject to PAYE and NIC and that Rangers FC was aware that what they were doing was illegal (and far from the scheme which they purchased from Baxendale-Walker), Rangers’ lawyer, Andrew Thornhill QC, faces a monumental task. I can only hope for Rangers’ sake that they were not so stupid as to provide written guarantees for players saying that they did not need to repay these loans!

So how much could Rangers owe? The listing below shows Rangers’ annual contributions to the EBT (data from Rangers’ Annual Reports):

2010

£ 1.36m

2009

£ 2.36m

2008

£ 2.29m

2007

£ 4.99m

2006

£ 9.19m

2005

£ 7.24m

2004

£ 7.25m

2003

£ 6.79m

2002

£ 5.18m

2001

£ 1.01m

Total:

£ 47.66m

So a total of about £48m has been paid into the trusts. The amount of tax due is actually open to debate. Some argue that this money should be treated as “post-tax” earnings. In such a case, Rangers would owe approx £32m in tax + £10m in NIC (Total of £42m). If this amount is treated as pre-tax earnings, the amount owed would be about £19m in PAYE and approx £5m in NIC (Total of £24m). My personal view is that this will be ruled as being “pre-tax” earnings and that the core bill payable will be about £24m.

In a case which goes back to 2001, the power of compound interest will work against Rangers. Interest charges are likely to be £10-12m on top of the £24m.

If Rangers lose this case, a separate process will begin to determine the amount of penalty to be applied. As discussed above, the extent of documentation on Rangers’ awareness of what they were doing is unlikely to bode well for any penalty payment. This would likely be 75-100% of the core underpayment amount. That could add another £18-24m to the bill.

In the next posting, we will review some of the myths and rubbish published on this subject.

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About rangerstaxcaseI have information on Rangers' tax case, and I will use this blog to provide the details of what Rangers FC have done, why it was illegal, and what the implications for what was (updated) one of the largest football clubs in Britain.

17 Responses to What is Rangers’ tax case all about?

Very well done. Even I understand this. The people in the know can run EBTs playing fast and loose with their moral obligation to pay tax, but staying just the right side of the law. They can do this because they know what they are doing. Rangers, in this case, are not the people.

Sounds like they are bang to rights. An open and shut case.
My own contact suggests you are right on the money here.
Three points:
1. Could criminal charges follow the settling of this case?
2. Would it be against Rangers interests to pursue an appeal?
3. Could HMRC demand payment of the £24m up front before they even considered an appeal?

Hi there, when is the first tier tribunal? It makes you wonder why they would even think of EBT’s and is probably best explained in thinking they were untouchable. And so they were till the Banks crashed…..Oops

Excellent summary of the situation, I will follow the blog with interest. Do you happen to know if HMRC are treating this as a test case before moving on to the bigger fish of the EPL? The ‘image rights’ and ‘commercial sponsorship’ scams down South must be ripe for the plucking…..if a team like Portsmouth can owe Sol Campbell nearly 2 million in ‘off contract’ pay, there must be hundreds ofmillions being salted away!

Good article and a murky concept clearly explained. I have a couple of quick questions though.

Are the trustees of the Rangers EBT specialist lawyers, as is usually the case, or are they other administrators? Is there any suggestion of conflict of interest regarding the administration of the scheme (ie are the individuals too close to Rangers)?
Is there any suggestion that transactions between the club and the EBT have not been conducted at arms-length? Will this have any implications for the trustees?

Possibly for footballers its a little different but i used to throw my bonuses and some of my wages into an AVC which is directly linked to my pension. My contributions to these are tax free. I believe there are tax penalties if i draw early. And please correct me if i’m wrong but dont professional sports stars have special dispensation when it comes to drawing their pensions. If these conditions are correct then any tuppence happeny accountant would advise his client that this would be his best course of action. So i have to ask myself WTF have Rangers been up to. Quite simply it would have been better to write the contracts and allow nature to take its course. However if it’s not only players involved then we have a whole new ball game. Those shredders at ibrox must have been very busy

There are a few similarities, but many more differences between the cases. Aberdeen Asset Management used an EBT- that much they have in common. However, there were a host of things that were different- such as the overseas component, the use of shares in companies, etc. To your question: were they the exact same? No. Definitely not.

It is perhaps natural that people want to draw comparisons between this case and others they have read about. The truth is that you cannot compare many, if any, of these cases. So forget about Vodaphone, Arsenal, or your uncle’s VAT problems… they are not the same as this case.